I was walking a manufacturing floor a while back, doing a site visit on a potential acquisition. Metal fabrication, $4M in EBITDA, owner retiring after 28 years. Good business on paper.

In the corner of the warehouse sat a forklift that looked like it had been purchased around 2007. I asked about it. The ops manager told me they'd bought it three years ago to handle a large one-time order from a customer who had since walked.

That forklift told me a lot more than the financials did.

The problem

Most buyers spend their diligence time looking at revenue quality, customer concentration, and margin trajectory. Those things matter. But there is a whole category of risk that shows up in almost every lower middle market business, and it rarely appears on the income statement until after you close.

It is operational debt. The accumulated weight of every decision the previous owner made to solve a problem quickly, without thinking about what it would cost to undo it later.

Operational debt is not a line item. It is a tax on everything you try to do next.

Software that cannot export its data cleanly. Processes that only work because one person understands them. Equipment bought for a temporary need that is now baked into the daily workflow. An approval process designed for 20 purchase orders a month that is quietly strangling a business doing 200.

Why it matters

If you miss it in diligence, you pay for it twice. You pay the purchase price as if the business is lean and scalable. Then you spend your first 18 months as owner fighting the infrastructure rather than building on it.

For an independent sponsor, that is particularly painful. You do not have a fund structure absorbing that friction across a portfolio. You have one deal, one management team, and a limited window to prove to your LP that you were right about this business.

The common fix is to hire a quality of earnings firm and call it done. QofE is valuable, but it looks backward. Operational debt is a forward problem. It tells you not what the business has earned, but what it will cost to grow it.

A better lens

The shift is simple in concept, harder in practice: stop evaluating the business only as it is today, and start evaluating it as it will need to be in three years.

Every process, piece of equipment, and software system the business runs on should be stress-tested against a future state. Not a hockey stick projection. Just a reasonable assumption that volume doubles, headcount grows, and you need the infrastructure to hold.

That is when the cracks show. Not at current run rate. At 2x or 3x current run rate.

Three steps to take now

1) Build a 2x stress test into your ops diligence. For every core process, ask: does this still work if volume doubles? If the answer requires adding a person, that is fine, and you can price it. If the answer is "it breaks, and we would need to rebuild the whole thing," that is a different conversation about valuation and transition support.

2) Map the single points of failure. In most LMM businesses, there are one or two people who are the operational system. They hold the knowledge of how things actually work. Ask the seller directly: if this person left in month three, what breaks? The answer will tell you how much of the business is truly transferable, and how quickly.

3) Ask about the last three times they bought something to solve a problem. Equipment, software, a new hire, a new vendor. What was the problem? What did they get? Does that solution still work? This conversation surfaces more operational reality than most formal diligence processes. Owners are often honest about this when you frame it as curiosity rather than scrutiny.

The takeaway

The forklift was not a deal killer. But it was a signal. Every bandaid a business has applied tells you something about how that owner made decisions under pressure, and whether those decisions will slow you down or not.

Operational debt is not a reason to pass. It is information. The buyers who learn to read it get better prices, cleaner post-close plans, and fewer surprises in year one. The ones who skip it find out the hard way that the deal they underwrote was not quite the business they bought.

If you have a deal in diligence right now and want a second set of eyes on the operational side, reply and tell me what you are looking at. I am happy to take a look at how you are thinking about it.

See you next Thursday!

— Ahmad